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Accounting of Fixed-Income Securities

A partnership has individual municipal...

A partnership has individual municipal bonds among its assets. These bonds have an original cost basis, but brokerage firm that holds the bonds in custody also reports the cost basis on fixed income securities adjusted for amortization, accretion or principal pay downs. Does the partnership use the original cost basis to report the year-end inventory of these bonds or the adjusted cost basis?


 


Also, in the case of sales, redemptions and transfers, are capital gains calculated on the original basis, or on the adjusted basis?

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Answered in 51 minutes by:
8/8/2013
MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,342
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Hi and welcome to JustAnswer:


Municipal bonds can never be sold at a loss if held to maturity, thus any premium paid for muni bond is amortized over the period until maturity. The amortization reduces the municipal interest income.

If there is an original issue discount muni purchased, interest is accreted each year (and reported as muni interest income) so that the basis in bond ultimately reaches maturity value.

Other muni bonds purchased at a market discount due to rate changes are held at cost until maturity and a capital gain is reported.

When there is principal received on a bond, the basis is reduced.

Gains/losses are determined on the adjusted basis.

I have also provided a link to a simple explanation of the various situations.

http://thewiseinvestorgroup.com/Wise-Investor-Files/Public/PDF_Files/Featured-Articles/TaxTreatmentofPremiumandDiscou.pdf


Steve

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Customer reply replied 4 years ago

 


Hi,



You only answered the second part of the question: capital gains/loss are determined on the adjusted basis. That's helpful, thanks.


 


But you didn't answer the first question, which is really the more pressing one right now.


 


How does a partnership, or any business entity, carry and report on form 1065 muni bonds, or other fixed income securities, on its balance sheet from year to year,


 


i) at the original cost basis


 


or


 


ii) does the carry value change each year in accordance with the adjusted cost basis?


 


I need a specific answer to that question, either i) or ii). Or perhaps something else.


 


Thank you.

Hi -

I sorry you believe you received poor service by my response.

I did explain it in my first statements. The explanation wasn't just yes or no, it was why and how.

To put it another way, except for market discounts on muni bonds, the basis is adjusted for the accretion/amortization of discount/premium. Basis is also reduced by principal payments on the bonds.

So the direct answer to your question is - ii

MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,342
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Customer reply replied 4 years ago


Dear Mequon,


 


Thank you for answering my tax question last week concerning the carrying value of individual bonds on a partnership balance sheet.


 


I also have to file form 3520-A. I was wondering if you also have expertise in that area, or know someone in this format who does.


 


I have tried to develop relationships with CPAs locally over the past few years, but have been highly unsatisfied, so I wind up doing it all myself, but get stuck on certain questions and points, so I seem to like this format where I can ask an expert concerning specific questions and points where I need help.


 


Thank you,


 


Steve

Hi -

I have some knowledge in that area, but would need to know your questions.
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Customer reply replied 4 years ago

Dear Mequon,


 


Okay, let's start with a very basic question.


 


A US person has a foreign grantor trust, whose income wholly passes through to the US grantor.


 


The trust has assets outside the US under its own name: let's call these assets the trust's "stand-alone" assets.


 


But the trust also owns 98% of a US domestic partnership which in turn has assets under its own name in the US and whose income also fully passes to the US grantor of the trust. This partnership files a normal 1065 partnership return and issues a K-1 to the US grantor.


 


On the 3520-A, does the trust report:


 


i) only its "stand-alone" assets and transactions,


 


or


 


ii) both its stand-alone accounts and 98% of the domestic partnership accounts.


 


If ii), then,


 


a) separately or


 


b) as one set of consolidated financial statements or


 


3) both stand-alone and consolidated accounts?


 


I hope the question is clear.


 


Thanks, Steve

Hi -

Based on my readings of the instructions and the form, you will include 100% of the trusts assets, liabilities, income and expenses. If you look in Part II, Line 4 it specifically lists income from partnerships. In Part III Balance Sheet, I would report as an "Other Asset", Line 10, Investment in Partnership A FEIN XX-XXXXXXX to specifically put the IRS on notice regarding that item, rather than showing it on Line 7.
MequonCPA
MequonCPA, Certified Public Accountant (CPA)
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MequonCPA
MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
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